The Drug

Two days ago when, when the Yankee stock market was shedding 300 points, this pathetic blog’s comment section brimmed with more nimrods that usual telling us why. America is a failed, bankrupt state, markets are rigged and all investors will be Hoovered. And that’s why Canadians cling to GICs and real estate.

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Yesterday we had a nice example of that latter. A poor old woman’s lifetime hovel went on the Toronto market and sold in a bidding war. It was uninhabitable, with no furnace, no safe wiring, holes in the roof, windows gone, covered in soot, mould and human waste. The story, of course, was about the house and how it could possibly be worth the $803,000 it commanded. What did that tell us about the real estate market and the yuppie desperados now driving it?

But what about the woman? Yes, she won the lottery – but at a point in her life when it hardly matters, and after living years in degradation and squalor. However if you listen to the house-humpers, the debt merchants and the realtors, she did everything right – buying low, steadily paying off bank debt, making interest payments, building equity, concentrating her net worth in safe residential real estate, then collecting the big payoff. So how could it turn out so badly?

In reality, this may end similarly for legions of folks who are on the same trajectory. Cheap money and house lust have driven property values to the point where it takes more than 100% of net income to afford a home in Vancouver – even with a honking 25% down payment. In Toronto owning any kind of non-condo requires over 70% of net income, and nationally it’s half, according to RBC.

Add in a kid or two, and it’s easy to see why so many couples save and invest nothing. No mystery there. The house ate the money. It’s why the personal savings rate in BC, for example, is negative, and why the province which has the only city in North America where over 70% of all houses are assessed at $1 million-plus, is shedding young people.

Sometimes real estate just isn’t worth it, if you end up being 60 or 80 and have to live in a big, expensive city on the piteous public pension. After all, the taxes on that hovel – even in its unrenovated, prehistoric, Mad Max state – were $4,414 a year. That’s hard to afford when the average CPP and OAS income is $11,200. No wonder there was no furnace, and she poisoned herself on the fumes of kerosene heaters, while the gentrifying, savingless yuppies on each side installed Miele and Wolf.

Whether it’s a house, a stock or a little hill of gold, putting all your money into one thing never works. Real estate is not an investment or a retirement plan. As I try to warn people here daily, this puppy can turn on you in an instant, becoming an illiquid burden which pays neither interest nor dividend, has ever-rising overhead and can shed value as easily as it materialized.

It’s not about shelter and security for your family. Shelter is everywhere. It’s easy to find, whether you rent or buy. What everyone actually needs a whole lot more in their lives is income. Without that, every day can bring suffering and true unhappiness. I cannot imagine the woman who watched young people fight over her Galley Avenue home took any joy in feeling it deteriorate around here. But clearly she felt trapped, perhaps confused and diminished. And poor. I know nothing of her life, but I would have enjoyed helping her. Step one – a decade ago – would have been turning the property into a stream of income that would put here in a safe, clean, social place. There is no reason she lived like a wild, urban animal, simply because that was ‘home.’

Try to learn this lesson. Never put all of what you have in one place. Never borrow your brains out figuring rising values will save you. Never misunderstand risk. It’s not financial markets which flutter for a few days or weeks, but rather the prospect of years without enough cash every month to find dignity.

Our minds have been addled by this housing drug. I spent time this week with a guy in Kelowna who, in his mid-fifties, has “successfully climbed the property ladder.” His house is worth a million, yet he has zero savings or investments. Now he has cancer. In that market his home in currently unsaleable, and he’ll never get the million. “You’re probably right,” he said after our exchange. So he’s decided to borrow $80,000 and renovate. I failed.

Scroll back and look at those pictures again from yesterday’s post. I mean it. There was a time when a promising young woman would give anything to have a nice house.

1 Comment for “The Drug”

Yay, more Rhetoric and no numbers. Dow is down about 6% since Jan 1, houses are not. I would like to live in a house, it would be nice. A House has been a good investment since early 2000s maybe longer, with the added bonus of having a place to live. Maybe he could convince me if he had a statistic or two.

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Garth Turner

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics.
Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.